Sun Metals – Lorraine Copper deal creates arbitrage opportunities

Sun Metals (SUNM.V) and Lorraine Copper (LLC.V) have entered into a definitive agreement whereby Sun Metals will acquire all outstanding shares of Lorraine Copper by issuing 0.54 of its own shares per share of Lorraine in order to consolidate the entire Stardust district in British Columbia where Sun Metals has encountered high-grade copper mineralization.

Based on the company’s respective share prices before the deal was announced, Sun Metals was offering C$0.24 per share of Lorraine Copper, which was a 40% premium based on Lorraine’s closing price the day before. As Sun Metals is currently trading at C$0.53, the ratio basically values one share of Lorraine Copper at C$0.286, creating an arbitrage possibility as Lorraine’s share price is trading substantially below the implied price.

At Lorraine’s closing price of C$0.245, buying a share of Lorraine would equate paying C$0.453 for a share of Sun Metals, creating an interesting arbitrage opportunity as current shareholders of Sun Metals could sell the SUNM stock and use the proceeds to purchase Lorraine shares, vote in favor of the agreement and effectively lower their purchase price by almost 15% (on the condition the deal goes through).